Netflix, Comcast, and the Future of Video Streaming

There is no doubt Netflix (NASDAQ: NFLX) will eventually need to make some changes as the price of content rises and the domestic market becomes saturated. To that end, the company has been attempting to make deals with content distributors like Comcast (NASDAQ: CMCSA) to boost its market share.

Competitors like Amazon Prime already have exclusive content deals in place with providers, such as Amazon.com (NASDAQ: AMZN) does with Nick Jr., where it offers customers popular children's content such as Blue's Clues, Dora the Explorer, and Go, Diego, Go!.

Most recently Amazon made an exclusive licensing deal with PBS Distribution to stream its popular Mr. Selfridge, DowntonAbbey, Under the Dome, and others.

Piggybacking on distribution networksIf and when a deal is made between Netflix and Comcast, or similar companies, it will be different than former content deals, because these will be distribution rather than content deals. I mean the former deals are for a company like Netflix to distribute content, while an agreement with a company like Comcast would be for Netflix to piggyback on its distribution network, effectively expanding its customer base.

That's not to say there won't be the need for marketing, as customers of Comcast and other distributors would still have to pay for the service. What a deal would do is it would create a built-in marketing team that can upsell the service to existing Comcast customers, which would make scaling Netflix much less expensive than it would be if it had to do it on its own.

Change in demographicThe demographic using Netflix, Amazon Prime or HuluPlus skews primarily to an 18 to 36 demographic in America, with 43% in that age group having a Netflix subscription, 17% having an Amazon Prime subscription, followed by HuluPlus with 8%. As the age rises for each streaming service, the percentage of subscribers goes down.

On the cable TV side it reverses, with 63% subscribing to cable being 68 or older. In the 49 to 67 age demo, 55% subscribe to cable TV in America. What is important to understand is any deal made with Comcast or another cable distributor will result in the streaming companies having a higher age demographic. On the Satellite TV side, the age difference isn't as pronounced, and skews younger than the cable TV crowd.

That suggests that if Netflix or Amazon Prime are able to make deals with cable companies, it would probably enjoy a more stable base, as there is a lot of churn with the younger demo for Netflix.

Value to distributorsContent providers, like the major TV broadcasters, have the upper hand in negotiating retransmission fees, which are what the distributors must pay to use of the content. If deals can be made between streamers and distributors, then Comcast and other distributors would almost certainly enjoy a stronger bargaining position when negotiating retransmission fees with content providers, which could slow down rising costs.

Streaming futureThere are questions as to what happens with Netflix and other streaming companies as the market matures. Amazon Prime has more visibility because of the ancillary benefits associated with the service. For example, the primary benefit of Amazon Prime is the lower costs of shipping.

Netflix doesn't have that option, so once the market reaches its peak, it's a possibility the streaming company will have to look for other revenue streams -- such as advertising. That's not likely to happen in the near future, but it's almost certainly going to happen sometime over the next several years.

That's why a deal with Comcast or another content distributor would be so beneficial, as it would delay the need to look for secondary revenue streams. There is also international growth, but that will by spotty and unpredictable; although there is a lot of room to add customers in those markets.

Foolish final wordsVideo streaming is not only here to stay, but is the future of content delivery. The question is, what form will it eventually take once the market is saturated? In the near term, it looks like partnerships will be the answer to strong growth, while further down the road another revenue stream will need to be added. That's probably more true for Netflix than Amazon Prime.

The Motley Fool's Top Stock for 2014The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

I wouldn't even characterize Amazon Prime as streaming...its more like pay per view. I could see the latest season of a series as pay per view but not season after season like Amazon. Its just a tease unless you pay more, no thanks!